Instantor's Blog

Transforming Lives Through Alternative Credit Scoring

For many of the world’s poorest countries, financial inclusion is a big problem. Large numbers of people have trouble just getting a bank account, let alone access to credit – particularly in non-OECD countries like Colombia, Ukraine and Vietnam, just to name a few.

Why Financial Inclusion Matters

Financial inclusion is one of the toughest challenges for the 21st century and is becoming a major priority for governments and policymakers. Financial inclusion means providing individuals with access to financial products and services that meet their needs; no matter their age, ethnicity, occupation or location. This includes access to financial services such as bank accounts, insurance options and most notably: credit products, essential for families and businesses to survive and grow.

Cartagena, Colombia. Image by Gus LDN

Many big international organisations, such as the World Bank Group (WBG), consider financial inclusion as a key enabler to reducing poverty and boosting prosperity for these at-risk countries by providing easier access to education, health services and risk management solutions.

Sadly, this level of inclusion is not currently available to all, especially across some of the world’s poorest nations. A huge number of non-OECD countries do not have the infrastructure in place to provide these basic services – leaving many individuals, families and businesses struggling financially.

Current credit decisions rely on factors such as where a person lives, their gender and their age. It is unfair to base creditworthiness on these parameters – just because a person is younger does not necessarily mean that they are not responsible with the money that they have, nor does it mean that they are less likely to repay a loan.

However, thanks to innovative work from high-tech companies such as Instantor, a global solution is closer than ever.

Mobile Banking is Laying the Groundwork for Financial Inclusion

Development of digital financial technology (FinTech) has already facilitated the expansion of financial services to populations that are hard to reach, thus paving the way forward for financial inclusion.

For example, digitalising cash-payments has introduced more people to transaction accounts (i.e. bank accounts) which are often the first step in getting access to credit products. Many companies are digitalising bank accounts through mobile banking, allowing individuals to manage accounts and make payments with mobile devices. These have been shown to transform nations that were typically informal and cash-based, into societies that are safer and have more regulated processes of dealing with money. Across the developing world, the new mobile money economy has vastly altered access to financial services, triggering economic growth.

For example, just two years after the introduction of the mobile banking system M-Pesa in Kenya, 6.5 million people had subscribed to their services. The new company went from strength to strength and by year five, the number of subscribers had grown to 17 million people. The best news is that the new mobile banking system sparked economic growth: in 2014, the shift to using mobile money systems resulted in dramatically lower crime rates in Kenya versus the prior years and also spurred growth in GDP by 25 per cent.

Sware, Kenya. Image by Tucker Tangeman

Getting a bank account is just the first piece of the financial inclusion puzzle. The second piece is access to credit. Once transactional banking history is in place, individuals are in a much better position to be considered for credit products. These are important because they allow individuals fairness in opportunities – whether through qualifying for a loan, renting a car or even getting a job, helping both the person and the economy to grow. Now, with alternative credit scoring systems, lenders can use transaction data from mobile banking accounts to provide credit products to populations that don’t currently have these options.

Alternative Credit Systems Provide a Solution to the Underbanked

Traditional credit scoring systems rely heavily on a person’s financial history, which is something that many people of non-OECD countries do not have. Exclusion from credit further accentuates financial exclusion, resulting in a catch-22 for many individuals. Why? Access to credit is reliant on a history of credit usage, which is impossible to get without having access to credit in the first place.

Luckily, alternative credit scoring can provide solutions to the underbanked that weren’t available just a few years ago. In conjunction with new products such as mobile banking, there is ample opportunity to transform the lives of many people in the world’s poorest countries.

Alternative credit scoring uses information such as transactional data from a person’s bank account to judge creditworthiness, in a bid to create a fairer credit lending system. A lender can ask potential candidates questions to determine their ability for a loan or mortgage that are not reliant on a credit history. These include: did this person pay their bills on time? Do they regularly go into their overdraft? Do they often withdraw large amounts of money late at night?

Image by Michal Janek

Using this type of transactional data provides a huge opportunity for many people in the poorest nations because it allows access to credit products in a fair and accessible way. Alternative credit scoring benefits the lender too – these tools have been shown to be better at assessing risk than current methods, so it’s a win-win situation.

The Future of Credit Scoring is Here

The good news is that the technology exists and is already being used in many OECD countries today. The hard part now is creating a unified solution for all nations – non-OECD countries included – by making alternative scoring the new norm and connecting the dots between the transformations already taking place, and the transformations that are possible.

Through companies such as Instantor, individuals in non-OECD countries that have a bank account can share their financial history with other financial institutions, to shop around for the best deal and to gain access to credit products previously unavailable to them. While one bank account is great, the opportunity to use other banks that may have better financial services is also important. Many companies have already begun this process and the future is looking promising.